A Closer Look at Secured Loans
For many people looking towards a brighter financial future, secured loans are very important. Secured loans are given to those that have collateral, whether it's physical property or assets, money is borrowed against items in case a borrower defaults and is unable to back the loan amount. An unpaid loan could result in the loss of assets and/or property in lieu of payment. Secured loans are common in daily life and are most commonly seen by homeowners. A mortgage, is the most prevalent and basic type of these loans. The lender reduces their risk, while offering borrowers lower interest rates and more flexible terms by engaging into this type of loan.
Secured Loans Explained Further
Secured loans are loans where a borrower pledges their assets as collateral for a loan. The debt incurred is "secured" by the lender in case a person is unable to pay. In the case that a borrower is unable to pay the loan amount the collateral that was placed to secure the loan is apprehended by the lender, and is most commonly seen in cases of home foreclosure. When a home is foreclosed on, the bank (usually the lender) takes the borrowers home in lieu of payment of the mortgage.
Secured loans usually require good credit scores, which segments a certain part of the population. However, there are some lenders that take into account bad credit, or improving credit. There are lenders that also offer secured lines of credit in the form of loans to those that have shown financial stability for quite some time. They could ask for further paperwork to prove this financial stability, but it usually means a positive outcome between lender and potential borrower.
The Purposes of Secured Loans
There are two main purposes for secured loans. The main purpose of these types of loans is to relieve the responsibility of the financial risk attributed to debt. This leads to the second major purpose of these loan types. The second purpose is to gain manageable terms not found with unsecured loans. These amenities, of sorts, include lower interest payments, longer terms, and more flexibility if financial hardship occurs. The repayment period of an unsecured loan, for instance, is much shorter and come with fees and higher interest rates for shorter periods of time.
Both of these purposes are to reduce risk and entice borrowers to accept broader, easier to manage terms. In these types of loans both the lender and the borrower accept responsibility in different terms and both acquire financial gains in different forms. The overall purposes can be broken down simply by stating that secured loans offer less risk to both parties than other loan types.
Different Types of Secured Loans
The most prevalent of these loan types is a mortgage loan. A mortgage loan is a major loan that uses the home as collateral. When a borrower is unable to payback the loan or faces financial hardship, they give back the home to the lender. This is most commonly known as foreclosure, and millions of homeowners face this hardship in down economies.
The second loan type is non-recourse loans. These are loans where the collateral stands alone as a repayment option in case of a defaulting of the loan terms. After the property is seized, there is no further repayment by the creditor. This most often is seen with repossessions, where the creditor's property (collateral) is seized by court order.
Secured loans hinge on collateral in case a debtor cannot pay the lender back. There are two major purposes of these loans, both of which are to reduce risk. Mortgages are common secured loans.
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